Dialing down corruption in Afghanistan

Foreign Policy
By Anjana Ravi and Eric Tyler Last week, Afghan president Hamid Karzai surprised U.S. and coalition officials by announcing the creation of a special tribunal and prosecutor to seek redress for the almost two year old Kabul Bank scandal. And earlier this month, the Afghan House of Representatives rejected the proposed federal budget in part because of the allocation of U.S. $80 million to Kabul Bank. Already, the Central Bank has poured $450 million into the beleaguered bank after it lost almost a billion dollars in the 2010 financial scandal. This money has been traced to interest-free loans given to Mahmoud Karzai, brother of President Karzai, to buy shares in the bank itself, and also to former CEO Khalil Frozi, who used bank funds to finance the President’s 2009 election campaign.

Though Afghan authorities arrested Frozi and Kabul Bank founder Sherkhan Farnood approximately nine months after the crisis, it was recently reported that neither can be found in their jail cells, and both are collecting rent from tenants occupying Dubai villas bought with illegally obtained loans. A year after the debacle, only 10% of the missing money had been recovered.

Kabul Bank is more than a symbol of the pervasive corruption plaguing Afghanistan’s government, it is the largest private financial institution in the country and an integral piece of infrastructure that has direct consequences for the country’s security and financial stability. If Afghanistan is to have any chance at a legitimate economy and stable future, it will need an efficient and trustworthy financial system.

In particular, Kabul Bank is a conduit for government payments to Afghan soldiers, police, and teachers. The United States aims to reduce American troop presence by 2013 and shift security duties to the Afghan military and police force. Absolutely vital to a “successful” drawdown is the establishment of a reliable and transparent payment system. The rampant corruption plaguing Kabul Bank shows that traditional banking systems may not be suitable for the Afghan economy at all. However, the United States Agency for International Development (USAID) is working with Afghan companies to provide an alternate solution – mobile money.

In the past year, mobile phone-based money transfers have taken off in Afghanistan. Three out of the four largest mobile network operators now offer mobile money services, two of which were launched in the last six months. Roshan, the telecommunication company that deployed the country’s first mobile money product in 2008, M-Paisa (“paisa” meaning money in Dari), has grown to 1.2 million registered customers that can receive salaries, pay bills, and make domestic financial transactions over their mobile phones. Last month, the company announced a partnership with Western Union to allow these customers to receive transfers from around the world directly to their mobile phones.

USAID has made mobile money central to Afghanistan’s financial development. According to USAID, while less than five percent of Afghans have access to a bank account, more than 60 percent of the population has access to a mobile phone. To accelerate the pace of its development, USAID has allocated more than $2 million to mobile network operators as part of its Mobile Money Innovation Grant Fund, and spearheaded the forming of the Afghan Mobile Money Operators Association. Currently, there are five USAID mobile phone payment projects underway, which range from the payments of teacher stipends to police force salaries, and 14 more mobile transfer projects in planning, according to a USAID official who spoke off-the-record. With the scaling of mobile money, an estimated $60 million annually could be retrieved that had been lost to corruption and fees.

Although promising, mobile money is not entirely immune to the harsh realities on the ground. In 2009, the Afghan government worked with Roshan to pilot a mobile phone-based salary payment system to 54 officers of the Afghan National Police Force who had previously received cash from their superiors. When the policemen took their SIM cards to the local M-Paisa offices to directly collect their entire salaries, they thought they had received a 36 percent raise, while what they were really seeing was a full salary untouched by crooked officials, according to a U.S. Air Force Colonel overseeing the project.

However, a confidential State Department cable released by Wikileaks revealed that a corrupt Afghan commander, frustrated that he was no longer able to skim off the top, fraudulently registered phones and collected his officers’ salaries. In a separate incident, the same commander ordered subordinates to handover their SIM cards and attempted to retrieve the salaries himself. Though the local M-Paisa employee refused to hand over the salaries to the commander, he was forced to go into hiding for fear of retribution. Despite direct reports to the Ministry of Interior and pressure from the U.S. Government, no one has been prosecuted.

The ability to efficiently pay Afghanistan’s security apparatus is critical to any post-war strategy, especially in the face of a U.S. drawdown and the ousting of private security firms. It is especially important for USAID efforts because $899 million worth of development programs they administer are in jeopardy without a functioning security force, according to a recent letter from Steven Trent, the acting Special Inspector General for Afghanistan Reconstruction. Though USAID says this claim is exaggerated, it still highlights the significance of dealing with the systemic corruption within Afghanistan’s financial system and in particular Kabul Bank, given its central role in government payments to soldiers.

Despite the importance of anti-corruption measures to security efforts, a clear disconnect between Afghan and U.S. officials gives reason to believe that Karzai’s recent announcement to prosecute those involved in the Kabul Bank crisis will not amount to much. As Afghans rushed to withdraw $800 million in deposits in the two weeks following the scandal’s breaking, Mahmoud Karzai insisted the bank was stable and not in danger of collapse while simultaneously asking the U.S. Treasury for monetary help in averting a crisis. When the U.S. refused a direct injection of capital, President Karzai publicly blamed the collapse on a lack of foreign technical support rather than the illegal activities of the bank’s leadership. A few months later, he banned U.S. government advisers from working with the country’s central bank, as they attempted to assist Afghan officials in regulating the financial system and tracking foreign aid, both of which were conditions for releasing $1.8 billion of donor funds.

While the ideal situation for USAID is an end to corruption’s hold on financial infrastructure, the reality is that they are working within a delicate political climate. According to a NYT/CBS News poll released this month, almost 70% of American respondents want an end to U.S. military efforts in Afghanistan. With this dramatic fall in American public opinion and election year politics putting the focus on a swift withdrawal of U.S. troops and transition to Afghan forces, the Obama administration is loath to engage in a battle with the Karzai government over corruption that is almost guaranteed to fail. Yet there are still ways for USAID to recognize the restraints of corruption and push forward; one of the promising solutions involves integrating mobile money to build a stronger financial system and more transparent post-transition payment system.

After all, the reality is also this: the results of development projects will have significant bearing on America’s legacy in a country where it has spent over 10 years, half a trillion dollars, and countless lives. USAID’s success, and ultimately that of the entire U.S. mission in Afghanistan, will depend on our ability to acknowledge that “success” is not an all or nothing proposition. Corruption exists but that doesn’t mean that the development community cannot adapt to work within its confinements.